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Blue Star - Research meeting extracts

Jun 4, 2009

Yesterday, we had a research meeting with the management of cooling solutions provider Blue Star. Our discussion revolved around a whole gamut of things currently affecting the companyís business and what the company is doing to interact appropriately with the economic environment, both currently and going forward. The following note enumerates the key takeaways from that meeting.
On the business climate
Until February 2009, things were getting extremely bad for the company to the extent that the management saw no hope in sight. But during March, certain segments like power, telecom, and airports started showing signs of revival and financial closure for projects began happening once again. By April, the company's outlook turned completely positive again. Now, the expectation is that with the election of a stable government, growth will happen very fast. Foreign capital will flow into the country as India makes its way towards increased liberalisation.

Some things that the management expects will give a direct push to Blue Starís business will be:

FDI in retail opening up on a very large scale going forward

Many SEZs getting cleared

Hospitals - the majority of which will move towards being fully air-conditioned in the years to come

Metro lines that will come up in every major city in future

Numerous airport projects which will take off

Riding on the back of such developments, Blue Star expects to clock a 30% growth rate in FY11, with a slower 15% growth in FY10 due to some sectors like IT/ITES that will take some time to recover.

For the air conditioning businesses, core infrastructure projects (metros, airports, etc.), social infrastructure projects (healthcare, education, etc.) and a surge in commercial establishments are expected to be growth drivers going forward. In terms of the professional electronics and industrial systems business, a 6% growth in the GDP translates into an approximate 20% growth for the segment.

On competition
Blue Star is, by the management's admission, a market leader in the central air conditioning segment in Indian having a 28%-30% market share. The only other players that possess some kind of dominance in that market are Voltas and ETA (based in Dubai), which have 25% and 17% of market share respectively. Voltas is more of contractor, compared to Blue Star which focuses equally on an integrated business model of being a manufacturer, contractor and after sales service provider. Also, while Voltas has interests internationally, especially due to its strong Middle East presence, Blue Star's main focus will continue to be the domestic market. While the third big player in the market - ETA - is a company that is extremely aggressive on the pricing front.

On capex
The company's capital expenditure for FY10 will include a carry forward capex (work in progress) from the previous year of Rs 200 to 250 m as also routine maintenance capex to the tune of about Rs 200 m leading to a total capex of about Rs 450 m for FY10.

Prospective risks
Some risks that could damage India's, and consequently Blue Star's, prospects include the risk of foreign capital inflow into the country stopping, the governmentís fiscal deficit widening further leading to an inadvertent high interest rate scenario.

What to expect?
At the current price of Rs 300, the stock is trading at a multiple of 11.4 times our estimated FY11 earnings. With the recent upsurge in the stock's price, valuations have moved towards the higher side of the spectrum. We shall soon be updating our research report on Blue Star factoring in the company's recent performance and our assumptions following our interaction with the management.

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